- Bank of America shares have been pummeled this year on a negative news cycle.
- The bank recently increased its dividend 400% as part of its newly approved capital return plan.
- The company's biggest lawsuit is apparently very close to being settled, removing the last major negative catalyst.
Bank of America (NYSE:BAC) shares have had a rough year. After touching $18 in March, shares nosedived to below $15 and since that time, have languished in the $15 area. That is where we find shares today but I would argue that recent news items have signaled the all clear for BAC shares to resume their uptrend. In this article, we'll take a quick look at some recent news and why I'm optimistic about BAC shares once more.
To begin, I think the earnings power of BAC is quite strong. The company has a well-known banking franchise, an enormous customer base, the firepower to lend in any manner it pleases and the world class Merrill Lynch operation. In other words, I think BAC's business is very strong and, someday, will earn a lot of money. I also believe in BAC's management; I can't express how impressed I am with CEO Moynihan since he took over. BAC was a mess when Moynihan took the reins and although it has been bumpy, the rough patches were caused by events that were largely out of his control; he's simply been controlling the damage for much of his tenure. Imagine what BAC could do if it was allowed to focus on the business instead of the news cycle.
Speaking of damage, BAC has been hit with lawsuit after lawsuit unlike any situation I've ever personally witnessed. BAC has paid more than $60 billion to settle lawsuits and pay fines for various misdeeds that occurred during the financial crisis, only some of which were actually the result of BAC employees' actions. The news we found out yesterday is that BAC has given in to the DoJ on its massive suit regarding mortgage practices before and during the crisis. BAC tried to settle for $12 billion and then again for $14 billion but the DoJ played hard ball and got what it wanted. The massive $16 to $17 billion settlement is unprecedented in the banking space but thankfully, only about half of it is in cash.
This lawsuit was the largest negative catalyst still overhanging on BAC by far and now that it has been resolved, investors can move on. It seems for the past couple of years we've done nothing but bounce from one massive lawsuit to another but at this point, I think everyone that could have sued BAC has done so. Thus, I think the road has been cleared of potential settlements going forward, at least ones that are of significant magnitude, and investors can get really crazy and focus on the business and how much money it makes (imagine that!).
The other major positive catalyst we received was that the Fed approved BAC's resubmitted capital plan, the result of the capital calculation error that was so well publicized earlier this year. The new plan, as expected, is for a dividend increase to five cents each quarter without the original $4 billion buyback. We knew this is what BAC was asking for but we didn't know if the Fed would play ball; now we know and that is unequivocally good news for the stock. BAC's yield, now ~1.3%, makes it a bit of a dividend stock instead of the fraction of a percent joke it was before. This is a huge positive catalyst for me.
BAC is certainly not an income stock yet but it is a lot closer than it was. One major knock on BAC was that it paid virtually no dividend; that is no longer the case and income investors can begin to take a look at BAC once more. It will be very interesting to see what BAC asks for next year at capital plan time to see what kind of dividend it wants to pay but for now, the five cents is a great start. In addition, the biggest overhang on shares has been removed and once the official announcement comes down that the DoJ settlement is done, which should happen in a couple of days, I suspect shares will move higher on the news. The news cycle has been so negative for BAC over the past couple of years that just the absence of more bad news is a positive. The bar is so low I think the only way for sentiment to move is up and with it, hopefully, we'll see a relief rally.